What's new?

 Well, what IS new, after all? 

I'm retired is what's new, mostly. After a long interval of looking, applying, interviewing and trying, I came to the conclusion that retired is the place to be. 

Now, there is a back story that will make it a more rational choice. in 2020, when everything shut down, so did I. Depression, with catatonia; the big sleep, of sorts. I checked out, entirely. No motivation to anything. Not even getting up, eating or drinking. 6 months of sleep, essentially. The only problem; I was 2/3 of the way to starving to death. I wasn't quite a scarecrow, but back to sophomore in high school weight. Increasing alarm on the part of family brought me to help in the form of ECT treatments. 25 of those put me back in the land of the living, with some side effects. When I gathered enough sense to begin to think for myself, I remembered my LTD policies. I applied and was accepted for benefits. The short version is, I can't go back to being a general surgeon for multiple reasons, so I qualify as completely disabled. That means enough disability income to replace a teacher's salary, anyway. It pays our bills. And, we don't really need access to the retirement funds. So, I'm not compelled to seek other employment. I am left with time to figure out "what's next?". I'm working on that with an executive coach. Depression is a bitch, and it doesn't just magically go away. It can be manageable, which it is, for the most part. Motivation is the big issue and I am much more a thinker than a doer these days. Side effects did not resolve completely. I am left with a word finding issue and some blocks of memory loss. Mostly I get along without too much difficulty. 

Living in the moment is a new skill, one that isn't learned instantly. I probably knew how once, about 50 years ago. I'm getting better at it, but I slip easily back into the state of free floating anxiety about the fact that I should be doing something gainful, only without an obvious objective. So, I practice assertive change in thought patterns, meditation and whatever way I can think of to get free of the urge to "go". 

I have experienced COVID in a significant way, also impacting my pathway towards a new equalibrium. I've had the acute form twice, roughly a year apart. In each case, I contracted the virus at the end of a vaccination interval. After recovery, I then got my booster, twice. I experienced many months of trailing symptoms, putting me in the Long COVID category, experienced by perhaps 10% of all who have had the acute infection. First there was POTS (positional orthostatic tachycardic syndrome). The second round added nausea/vomiting to the other symptoms, so I decided to rule out life threatening coronary disease with a cardiology consult and nuclear cardiac scan. Recently, I began experiencing muscle soreness and cramping after modest exertion. Instead of recovering like one would expect, it persisted and worsened. I stopped the statin I was taking. Thus far, this hasn't changed my status. There's a syndrome called PEM (post exertional malaise) which behaves alot like ME/CFS (Myalgic encephalomyelitis/chronic fatigue syndrome), that has been associated with long COVID. This raises all kinds of suspicions, but there aren't routine diagnostic tests for these entities, so my approach is to excercise patience and see what transpires over time. This stuff threw me off my pathway towards equanimity, however, and I had to both receive and embrace the physical phenomena as well as the mental/emotional effects of having been "sidelined". 

All this experience has reinforced the fact that I am in retirement from my former career as a clinician and surgeon. It doesn't mean I'm done with meaningful engagement in the public square, but it does mean that until the inspiration strikes and the opportunity presents itself, I am in a sabbatical mode, reading, studying, meditating, corresponding and working with the coach to help chart the path into the unknown. 

I am no longer much of a saver, just a bit from my 0.05FTE position as medical director of the laser services business. I defer about 20% of my modest stipend, adding up to a few thousand dollars each year into a basket of mutual funds. The bulk of my life savings is distributed between IRAs that roughly follow my dividend growth objectives, but with some additional diversity recommended by the investment advisors. I could reclaim my role as independent manager of my retirement portfolio, but some irrational relationship constraints keep me attached to the advisors, as significant cost each year. Since I can't resolve the opposing positions of hiring expertise versus trusting my own investment sense, I have kept the advisors. I think I'll begin building a parallel set of accounts to give me something useful to do and scratch my investment strategy itch. 

My wife and I are in between the contributor and the recipient phase in our retirement assets. We are both earning income on a part time basis, contributing to 401k accounts to take advantage of the employer match, but also supplementing our monthly income stream with modest distributions from the IRAs. I am taking episodic distributions from my Roth IRA to support a sizeable remodeling project on our home. My hope is that the current market performance will maintain the corpus of our retirement assets during this interval and once our remodeling project is complete, we'll have lower expenses and will begin the planning for "downsizing". The first phase of downsizing will be simply to resume renting out our ADU in the basement and reducing our financial footprint, once we're able to move back into the main floor of our home. We have one significantly increased line item in the expense ledger; college tuition. That'll be with us another 3+ years. 

I think we'll be ready to leave the current home about when Alex graduates from college. That gives us 3+ years to upgrade, enjoy and wait for a better interest rate environment to exchange residences. That also means age 67 for each of us, perhaps the right time to apply for our SSI benefits and kiss employment goodbye. 

When I started this journal, I didn't know how I would be prepared for retirement. I had no timeline,  certainly didn't believe I would leave my surgical career earlier than late 60's, even 70's. Life turned out differently. Still, we have enough saved and working for us to be secure and meet our obligations. God is good, thus far we enjoy reasonably good health and look forward to where we'll land when the boy is fully fledged.

Time marches on...

 It is November 10, 2022; 

two days past the national mid-term election, with a few outstanding races still undecided as the last ballots are counted, with control of Congress on the line. As far as I can tell, the financial markets have paid almost no attention whatsoever. We're in a new era this year; inflation is back with a roar. The federal Reserve is doing what it has done previously to get it under control; raise interest rates. There has been a correction in the stock market, the word recession is increasingly being used amongst the forecasters even as employment is at historic highs and personal discretionary spending remains robust. 

My wife and I excercised what is known as a 72t early and substantial distribution from retirement assets, a program that avoids the early withdrawal penalty from 401k, IRA assets, starting in 2019, I believe. This coming year, we will no longer be obliged to make that withdrawal, but in the interim we went from high-earning to middle-class average yearly earned income, so we'll probably continue to withdraw at some rate. We are also past the magic age of 59.5, so there won't be penalties regardless. And, we have funded Roth IRAs, opened a joint expense account to which we both contribute a portion of our earned income and distributions. Our boy will graduate from high school this year, has college plans and will take a big piece of our cash flow with him to college. I'm not complaining, only understanding that we will make substantial changes in our financial practices coming up soon. 

At this time, there doesn't seem to be a reason to change our basic investment strategy or expectations, other than to anticipate that capital gains are not assured by any means, and capital losses don't mean we have to sell and buy treasury bills.

Yet another pivot, but no change in overall goals.

So, I did it.  

 I recalled that account from the advisor who took a walkabout from the service I wanted him to provide. I sat on the cash for several weeks. Then, slowly, I dusted off my old routine, began reading about the status of the market, began looking for fairly valued/undervalued dividend paying, dividend growth equities. Over several weeks, I got back to fully invested. I still have a lot more cash in a bond fund that I haven't touched; more on that later. 

As a preface for the following, I should mention that I am on the cusp of returning to work. After a long and thorough search, I now have three, count'm three, opportunities in front of me. I am pursuing all in parallel, assuming that one or even two could fall through. I have the real prospect of returning to the kind of earnings I once had with quite a bit less effort than I expended back then.

 I also had a follow-up conversation with the advisors who hold the other half of our retirement assets. I put the screws to them to explain in more detail how their services distinguish them from average, and why I should continue to pay them for overseeing my accounts.  Frankly, they did a good job of it. And, wonder of wonders, I decided to go ahead and consolidate all of our liquid assets under their management. In one sense it seems exactly opposite of my thoughts only a few months ago, but then, I am returning to work, and the single most productive use of my time is in doing what I know best, functioning as a physician. I was also able to get a good  look at performance of the funds, which convinced me that the account performance far outweighed the management fees. 

I intend to continue to be an interested and engaged participant in the management of our assets. I have principles I'd like to see tested and validated. After all, it's my money. I'm not resistant to the advice of professionals. I simply want to understand the source of their recommendations. So what about the bond fund? I think I'll handle that issue through dialogue; it represents only about 10-15%of the entirety of the asset base, but a big enough chunk to make a measurable difference in growth/earnings if deployed into other asset classes. Which ones?  let's see what the experts say.

Principles;

1) Our retirement assets are a business. We are the owners of that business. 

2) The business will eventually need to pay our expenses, without eroding it's basis. I'm not interested in a shrinking business. I'd like it to maintain itself, taking inflation into account. Better yet, I'd like to see it grow. 

3) Success in our business is not determined by benchmarks. It is determined by an acceptable level of performance according to several metrics. As a conglomerate, each component needs to perform at minimal levels, or that component should be sold and replaced. 

a. Earnings and earnings growth; Positive earnings yearly, earnings yield of 5%+, and 6-7% earnings growth is a good target. 

b. Dividends and dividend growth; across the portfolio an average of 3% dividend yield, and 5+% dividend growth are thresholds for holding, consideration of sell/replace. 

c. Quality; credit rating, presence or absence of volatility. I like steady-Eddy companies. Cyclical is not my thing. 

d. Diversity; look for diversity across market sectors. I'm not all that interested in international holdings as a class for diversity sake. I feel like 50 individual holdings is more than enough to insure against a total meltdown in one or another component of the conglomerate. Diversity in asset class (healthy component of real estate) as well as earnings methods. sales, services, rents, debt service, etc.

e. Valuation;  important at purchase, potentially useful at a point of re-balancing, otherwise it can be ignored as long as other metrics are holding up. 

f. Growth;  growth is good, but there's nothing wrong with a company that is highly profitable and rewards it's owners in a slow-to-no growth sector. I can achieve growth in my position with reinvestment. 

The overall goal is steady and growing income, with reinvestment as appropriate, depending on the need for cash to cover expenses. We don't require "rich" to be secure and content. Our goal is "enough" and a secure, growing asset base and stream of income. I don't see a time when we should sell the business.

I'm taking the plunge, hiring myself...

So;

Another few weeks of deep reflection have yielded some movement in the retirement investing arena. I'm moving back to personally managing my retirement assets. Incrementally, I might add. 

The why's; I have always been somewhat uncomfortable with the cost of professional advisors under either commission or AUM methods of compensation. I just can't get comfortable with how much of the asset performance they charge. Recently, one of my advisors spun out of control, in my assessment. He blurred the lines between advisor, friend, potential business associate;  began "pitching" a new set of relationships, dangled a potential business proposition hidden behind an NDA, making me increasingly uncomfortable. In addition, he became difficult to pin down to an actual meeting. I scheduled and rescheduled, couldn't seem to capture his time. I looked carefully into what I was receiving in the way of management expertise, became convinced that I can duplicate this easily without a broker/dealer relationship and initiated transfer of my assets, notified him of my decision. Now, I'm just waiting for the funds to show up in my Fidelity account. The other half of my retirement assets are with another adviser, but with the identical AUM format. It's much easier to schedule time with him, but I'm not sure I am receiving any more value for the fees. So, we'll meet and review the whole situation in a week or two. 

Behind the why's;  in a few short years, I went from short on time/long on income to short on income/long on time. Asset management fees are costing at least 10% of my prior take-home pay after taxes and retirement account deferrals. I can no longer offset those costs with additional contributions, at least for the time being.  

What will I do with those assets?  I intend to remain fully invested, with a bias towards dividend/distribution paying investments, diversification across sectors, a modest, focused micro/small-cap exposure, tilt towards value versus growth, exposure to real estate investment. I'm going to look very hard for alternatives to a big position in bond funds to anchor the value against market corrections.  I want an average of 3% dividend yield, reinvested via DRIP, 12% total yield if possible, although I'll be satisfied with 7-8% with high quality companies. I have several reliable sources of research; it won't be difficult to sleep well at night, and I'll be paying myself between 10-20k in expense reduction. That's worth 80-160 hours of labor at my prior earnings capacity. We'll see if I actually spend that many hours managing/monitoring the accounts in the next 12 months. I'll do my best to avoid simply comparing total yield to big market benchmarks as a means of measuring performance. If I'm to have an income producing "business" whose capital assets are equities, I need to deliberately build that business and manage it according to capital value, income generation, expense control, reinvestment for growing income. I will have to become comfortable trading "advisory expertise" for investment of my own time/labor in running the business. 

Am I being prudent? Am I being impulsive? Am I responding to frustration/boredom? Is this "right" for me and my family? All good questions... right now, I'll engage with 50% of our retirement portfolio and reserve judgement on the other adviser pending our upcoming meeting. 

 

Courage, Change and other weighty concepts

 There are times and events in one's life that call forth the need for courage. Often, something has changed, is about to change, and a response is required that takes courage. For me, things changed when burnout/depression destroyed my career. In retrospect, things needed to change, I reacted poorly to the need to adjust to change and I was the architect of my own demise. So, the circumstances changed dramatically, and not in a way that I would have planned, had I been on my toes rather than on my heels. 

I didn't lack courage in the resistance to change. I put up a spirited, prolonged resistance. It wore me down, in addition to the usual daily burdens of a busy surgical practice. And, I lost the trench war. Then I lost even more. My alternative solutions also failed, for the most part. So, I went into hibernation. Now I'm out of hibernation, re-assessing every aspect of my life, my values, opportunities, ways to step forward into the future. Turns out, this takes courage as well. 

Courage and motivation go hand in hand. It's hard to show courage when one lacks motivation to take action. Sometimes it takes courage to sit on one's hands, let other parties show their hand, let transient things pass, not react to every stimulus. Courage may partner with patience too.  What are the values that drive deliberate and successful response to change? Let's give it a try...

1) Courage

2) Motivation

3) Patience

4) Persistence

5) Optimism

6) Humor

7) Self-respect, respect for others

8) Forgiveness 

Maybe there are more; I'll keep an open mind about this list. 

With respect to preparedness for retirement, its useful to think about what has changed, what remains the same over time.

What is the same?

    a) need/desire for security

    b) need for confidence in the plan

What has changed?

    a) expected "retirement" date

    b) lifetime earnings expectation

    c) personal/professional identity

    d) potential for further moving/downsizing 

    e) goals/aspirations in career/public life

One aspect of my current status of "in-between" is re-evaluation of my relationship to money, our accumulated assets, our advisors. 

I have allowed our insurance advisor to morph into wealth manager for roughly half of our retirement assets. I have split our corpus of retirement assets and placed the other half with another advisor. These  advisors both follow a similar model; they are brokers for other entities that actually do the investment management. So, what are the broker's responsibilities? There is certainly a component of attention to "comprehensive". How well that is done, how that fits the view of the customer (me) is part of the question. Have they heard me? Have they addressed/answered the persistent questions I have about the philosophy of managing our assets? Perhaps it would have made sense to split the assets a different way; i.e. use an advisor for Kathleen's accounts and keep my accounts "self-managed".  Or, search harder for an advisor with a style that synches with my interest/need for a hand in the architecture of the financial plan. 

What would I like to see in our investment portfolio? 

1) would like to see, clearly, the assets produce cash-flow into the accounts; that means interest and dividends. Since interest is nearly non-existent, it means dividends/distributions. I want to see 3-4% cash flow in distributions,  growing by 7-10% in dollar amount yearly. 

2) I would like to see diversification across asset classes, excluding bonds/bond funds/cash equivalents

3) I would like to find a suitable substitute for bonds, for the reasons they are normally included in asset allocation

4) I  would like to see certain principles applied in active management; attention to valuation, dividend policy,  a low beta, recession/correction resistant industry, etc. 

Is there something fundamentally wrong with either the asset allocations or the investment strategies of my current managers. No, not really. So, why am I vaguely dissatisfied with the arrangements I have. Partly, it's the nature of the relationship. I don't hear them thinking, I don't get to think along with them. There is less interaction/engagement than I'd like to have. There is an opacity to the whole thing that I don't like.

From a technical standpoint, I am continually losing access to the websites that record our assets. It's a username/password issue, and it's very frustrating. Also, the reporting on the websites is not all that easy to understand. 

So, where should I show courage and effect change? Do I simply demand more service? Should I seek out and hire a new/different advisor? Should I simply call the funds back to Schwab or Fidelity and save the advisor fees?

 

Independence Day?

 It's July 4; 

Thankfully, for whatever reason, I'm not hearing any noise yet to suggest to me or my hounds that random explosions could be occurring all around us. It's hot, dry and I live in a suburban forest, which could easily combust with adequate provocation. 

Independence Day; what does that mean, beyond the strictly historic definition. 

Are we, am I, independent? If so, from what?  Seems to me, I (we) are far more dependent, or inter-dependent than we are independent. As a nation, we boast of our independence. We crave it, believe in it, define our national character by it. But, in order to have a future, we'll have to embrace the fact that our border has little to do with what we need to do to secure a future for ourselves. The underlying forces that define the conditions under which we live do not respect borders. We are both dependent and interdependent on how we embrace changes needed to preserve a world in which we can all live.

An underlying theme of this series of messages has been financial independence in retirement. How sad it would be, after all this time and effort, if I could not support myself and my wife in retirement,  after we launch our son into the world in a very few years hence. 

In our working/producing years, we pay our way mostly by earnings, measured by the size of our paychecks. One goal shared by most earners is to earn in excess of one's basic expenses, so as to accumulate assets, or wealth. If one earns enough and socks away enough earnings, then retirement has far fewer worries. Most of us will not earn enough to put enough away in cash-equivalents to secure a 30+ year retirement. The excess earnings must also earn. Wealth generation is about owning a growing pile of assets. Security in retirement is about the ability to collect cash from those assets, or turn them into cash at a rate that will last to our last breath or beyond. That is financial independence. 

One can define financial independence as the point where one no longer needs to generate earnings by one's labor; i.e. the ownership of adequate assets that their earnings covers one's expenses. Buried under that simple definition are alot of "if's". One is independent IF;

1) Assets are larger than one's current and future expenses

2) Expenses do not grow in excess of assets and/or income derived from them

3) Timeline to one's own demise is equal or shorter than planned

4) One does or doesn't need or desire that assets remain at the date of one's death. 

Couples need to take "last to die" into account. Some expenses are fixed, others are variable, many tend to increase, at least at the rate of inflation if not more. The ideal wealth management strategy is to own enough assets of a sort that generate passive income, that those assets grow in value in excess of one's living expenses and the rate of inflation, so that one isn't tasked with accurately estimating the timeline to death. There's always philanthropy as a means of dispensing with excess assets when they are no longer needed. 

One needs to turn assets into cash flow when no longer laboring to earn wages. The dominant paradigm is to "invest" in a broad spectrum of asset classes, aim for the highest possible value, then turn assets into cash towards the end of life. A different approach could be to acquire assets that generate cash, hopefully growing amounts of cash such that one doesn't need to divest of assets in order to cover expenses. Personally, I like this idea far better than simply piling up assets. I would prefer to own assets that generate a growing stream of income. That's just me. I can choose to take passive earnings as cash to pay expenses, re-invest in additional assets, give away to causes that are meaningful to me, support my heirs while I am still alive, spend a little "mad-money" now and again. I'm past the point in life where I need to accumulate more stuff; in fact I need to steadily off-load the excess stuff I already own that doesn't enhance my life now and into the future. 

I have a wife and one son. For my wife and I, "last to die" is meaningful. Almost certainly, she will outlast me. We have accumulated enough assets to sustain us if we behave reasonably. She is substantially protected by a permanent life insurance policy I purchased many years ago which will substantially recharge her assets on the date of my death. She has a similar policy, albeit somewhat smaller, that could do the same for me if my life extends past the end of hers. We don't have the goal to turn our son into a trust-fund baby. Still, at a point further into his life, I'd like to relieve him of the worry about adequate retirement assets. That'll be the subject of our estate plan, provided residual assets remain after we're both gone. There are others we could also include in that plan. We both have siblings who have had less financial success than us. We have nieces and nephews, grand-nieces and nephews, eventually may have grandchildren. There are institutions to which we owe some of our success in life. 

I may re-enter the workforce, provided I can find an acceptable means to do so. If not, we have entered the consumption phase of our adult lives and must make our retirement assets work for us. This puts more emphasis on the nature of those assets; I fundamentally don't like selling assets to pay expenses. That'll be the subject of my attention in retirement investing going forward. I guess I should pay some particular attention to how distributions from our retirement accounts are taxed to understand the difference between dividends/interest and sales of shares/capital gains.

Here we are,  already at mid-year, a short 9 days from the official start of summer. I have been "awake" for 8 months, anchored mostly at home in pandemic associated isolation. Since being vaccinated in April, I am increasingly getting out in public and I've been engaged along several fronts in preparing to re-enter the public square. I have been paying more specific attention to retirement assets, due to my need to occupy my time, my lower overall income and a re-emergence of my interest in investing as a topic of interest now that I'm not working at a day job. So, I'm considering the possibility of returning to self-management of my IRAs. Why would I do this, having split our assets in half and employed two professional money management firms about 2 years ago?  

Several features of professional management don't sit very well with me. First is reliance of funds and funds of funds for diversification. I know this runs against the common wisdom, but even no-load low fee funds bleed off fees, and include low performers within their investment portfolios. I personally think that one can make choices amongst equities based on principal, which can better serve the individual investor's needs, even if the total return may be different (i.e. less) than indexed funds. 

Second, advisor fees. both of my advisors take approximately 1% of assets under management. That's with or without much work. 1% of assets under management is somewhere between 3 and 10% of total return/year. That's not peanuts. Over a few decades, the difference adds up to very substantial differences in overall portfolio performance. 

Third; the asset allocation models, even "aggressive" approaches, includes fixed income classes such as bond index funds, whose performance is currently pretty poor. I think there are alternatives that can provide non-correlated performance to the SP500 or total market index fund returns. In today's environment, holding assets in bonds is about like having a savings account. If inflation increases, interest rates rise and bond prices drop. Bond prices are unlikely to rise much further, as bond interest rates are near zero, so there's barely any upside at all to holding bonds. They are a "hedge against inflation" but don't do much to enhance portfolio performance. 

Fourth, I'm not a fan of harvesting dividends and selectively reinvesting them; perhaps it makes more sense in a fund-based investing scheme, since the investor can't adjust individual holdings weighting, but it tends to obscure the overall performance of pieces of one's asset allocation. When I own individual equities, dividend reinvestment is a decent fraction of an individual holding's performance, and it isn't obscured by purchases made from another holding's dividend payout. I much prefer DRIP investing, which allows me to clearly see total performance of a given holding. An increasing share count is very meaningful when one wants to build a portfolio that can produce enough cash to support distributions in retirement, and DRIP is a really good way to grow a position. Every distribution results in a larger position (number of shares) irrespective of what price is doing. 

 Building cash within a portfolio assists with rebalancing strategies which may or may not be on a quarterly basis, reducing the amount of buying or selling of equities to carry out the rebalancing. Building cash is also helpful if one is living off of distributions. Once one has a portfolio large enough to safely cover living expenses out of total return with some margin of error, precisely matching or beating the market is no longer so important, but it certainly is useful to attempt to continue growing the asset base, i.e. earning more than one is withdrawing. 

 I have some compunction about kicking the advisors to the curb; however I think there must be a compensation scheme that is more performance-based than AUM. Perhaps I should research that topic a bit before taking any major moves away from professional management. After all, I wouldn't expect any of the managers to switch to self-serve surgical care, and I am paid for my work, even if complications occur. I do my best and a portion of the outcome is out of my hands. Likewise the money managers...

I'll be revisiting this topic periodically as the months go along. If I'm successful in defining and executing on my plans for an encore career, the incentive to self-manage retirement assets could easily reverse itself again.